The trucking industry has seen an important slow down since the last economic crisis. Competition has turned extreme among the few great players, offering enough discount to the point where some operate at a loss. Navistar International (NAV) is an example of a troubled player aiming to secure market share while facing great financial troubles. Someone who has done better is PACCAR (PCAR), but it remains to be seen whether the stock is a good investment in the long-term. The stock displays some interesting financial characteristics for such and investment, but gurus have shown little interest on it. Hence, this analysis will look at the company’s current standing and prospects for growth to tell whether the stock holds, or not, prospects for growth.
Expansion and New Management
Analysts from several financial institutions have highlighted PACCAR throughout the last two months, giving the stock a “Buy” rating and raising target price. Jefferies Group, Barclays, DA Davidson and BMO Capital Markets have taken target price to an average of $69 per share, with a low of $60 and a high of $78. At the same time Goldman Sachs has been the latest institution to give the stock a “Buy” rating, following on the steps of Morgan Stanley, ISI Group and Robert W. Baird.
Most importantly, PACCAR expanded operations to the largest emerging market in the Americas: Brazil, during 2013. "The 300,000-square-foot assembly facility on 569 acres is a high-technology, environmentally friendly plant that will assemble the premium-quality DAF XF, CF and LF vehicles. The factory will build DAF trucks for Brasil and the South American market,” said Mark Pigott, PACCAR chairman and chief executive officer. The facility represents a $320 million investment by the company, and is expected to serve this rapidly growing premium segment.
Additional good news for PACCAR come from the engines segment. “Kenworth had a record year of PACCAR MX-13 engine sales in 2013,” said Preston Feight, Kenworth assistant general manager of sales and marketing. The 2014 PACCAR MX-13 offers up to 1.5 percent fuel economy improvement over its 2013 version, which will provide nearly $1,200 in annual fuel savings for the typical long-haul truck. Such performance comes to support new chief executive officer, Ronald E. Armstrong.
Should Growth Be Expected?
For the last three years, PACCAR has seen overall improvements in performance. Revenue and net income have improved steadily since 2009, although at a slower rhythm during the last two years. The same progress applies to cash flow, and debt has been progressively eliminated. Most importantly, operating margin has stood at or above 10% during the same period, returning free cash to positive levels.
PACCAR is set to continue the positive trend backed by a positive economic environment. Most importantly, the company has developed rewarding partnerships with Kenworth and Peterbilt. Both agreements have granted the company increasing market share, as fuel-efficient engines were coupled to low operating cost vehicles. Competitive advantages obtained through a continuing research and development are expected to grow over $275 million in 2014. That will be coupled with capital investments of around $400 million.
Another positive characteristic for continued growth is PACCAR’s geographical diversity. Besides improving market positioning in North America, the company is progressively increasing market share in South America and Europe. In turn, the spreading of operations has generated greater volumes of cash that are disbursed in share value, creating policies through special dividends and repurchase programs.
PACCAR currently trades at 19.7 times its trailing earnings, carrying a 62% discount to the industry average. Although NWQ Managers (Trades, Portfolio) has been selling part of its investment, the hedge fund chose the stock for a long-term investment, and is only progressively selling stock. Given a recent drop on face value, it is recommended to take a position for a long-term investment and take advantage of the discount.
Disclosure: Vanina Egea holds no position in any of the mentioned stocks.